0% APR car deals Do they really make sense? Advertiser Disclosure Advertiser Disclosure We are an independent, advertising-supported comparison service. Our mission is to help you make better financial decisions by providing you with financial calculators and interactive tools that provide objective and original content, by enabling you to conduct research and compare data for free and help you make informed financial decisions. Bankrate has partnerships with issuers such as, but not limited to American Express, Bank of America, Capital One, Chase, Citi and Discover. How We Earn Profit The offers that appear on this website are provided by companies who pay us. This compensation could affect how and where products appear on the site, such as, for example, the sequence in which they be listed within the categories of listing, except where prohibited by law for our mortgage or home equity products, as well as other home loan products. This compensation, however, does not influence the information we provide, or the reviews appear on this website. We do not include the vast array of companies or financial deals that may be available to you. @VeraNovember/Twenty20
6 minutes read. The publication was published on March 02, 2023.
Writer: Michelle Black Michelle Black Written by Contributing writer Michelle Lambright Black is a credit expert with over 19 years of experience. She’s a freelance writer and an accredited credit expert witness. Alongside writing for Bankrate Michelle’s writing is included in numerous publications such as FICO, Experian, Forbes, U.S. News & World Report and Reader’s Digest, among others. Written by Rhys Subitch Editored by Auto loans Editor Rhys has been writing and editing for Bankrate since the end of 2021. They are passionate about helping readers gain the confidence to manage their finances with concise, well-researched and accurate information that breaks down otherwise complex topics into manageable bites. The Bankrate promise
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They are worth the cost if you can reduce your monthly payments. However, you must have an excellent credit score to qualify. Be sure to keep both the cost-effectiveness as well as the eligibility of your car while taking a test drive.
What is 0% APR? A 0 percent APR or essentially means you borrow money at no cost. The monthly installments you pay back your lender for the money it paid to the dealer, however no additional money from your pocket goes into the lender’s bank account. This differs from the typical approach, where the lender will charge you in exchange for financing. Interest and fees, after all, are the main ways that lenders earn money. Here’s an example of the distinction in monthly cost a 0 percent APR can bring compared to the more common APR. Average rate
0 percent APR
Amount financed
$27,564
$27,564
A loan term
60 months
60 months
APR
5.47%
0%
Monthly payment
$478
$418
Total cost
$28,704
$25,064
How does 0% APR work? A car loan that is interest-free sounds too appealing to be real. But these financing deals are a tool that manufacturers of automobiles can utilize to make more sales. The lenders that provide zero percent financing are known as captive finance companies , and are linked to . A few examples of captive lenders are Ford Motor Credit, GM Financial, Nissan Finance, Toyota Financial Services and more. So, if Ford is looking to increase sales of its F-150s to address overstock issues, it might offer zero APR loans to a select group of borrowers via its own financing arm. The no-interest option is to be more affordable in the first place, but that’s not always the situation. When auto manufacturers offer 0 percent finance, they could try to cover “lost” earnings in different ways. For instance, a dealer may push hard to sell you on the spot or with your vehicle. Also, you may have to give up benefits such as rebates, which normally bring down your purchase cost. How to qualify for the 0% APR car deal? Zero percent financing deals are generally reserved for borrowers with good credit scores usually referred to as having a credit score that is 800 and over. You should do this prior to when you begin looking for auto financing. Each lender also has their own definition of good credit and its qualification requirements could vary from vehicle to vehicle. Because zero APR qualification standards vary so widely, your best bet is to contact the dealership prior to the time. You can inquire about the criteria you will need to meet to qualify for an interest-free loan on a particular automobile. Apart from your credit score and your income, an auto lender will consider other aspects in evaluating the application, including: . Employment record. Address and income verification. No matter the state of your credit -good, bad fair or excellent , you must seek out to from outside financing sources too. A preapproval is a great way to compare the options available and provide an alternative plan in case you aren’t eligible to take advantage of the special offer from the automaker. Limits on zero-interest financing might be a great deal for some people. But, there are couple of potential issues to be aware of when you are considering this type of financing. The limited options for interest-free financing is only available for certain types of vehicles. First, the vehicle you buy will most likely require . Automobile manufacturers also offer special financing deals for vehicle models where there’s an excess of stock must be moved. Limits on repayment options depending on the offer the repayment options for zero percent financing might be limited. Most of the time you’ll have a shorter time to pay off the loan than you might have otherwise. Of course, there’s nothing wrong with paying back the loan fast but you need to ensure that you can manage the greater monthly payments without putting your budget in jeopardy. 0% financing vs. bonuses Cash offers from automakers want you to purchase your next vehicle from their brand and not from a competitor. This is a key reason that 0% financing deals are offered to begin with. To attract new customers, auto makers often provide buyers with. Sadly, an auto manufacturer may not permit you to avail the 0% financing rate and the bonus cash. If you’re facing this issue, you’ll have to decide which savings opportunity is . Tips from Bankrate
Using an is a way to evaluate zero percent financing with cash rewards. Sometimes, using the cash rebate that a dealership offers with the higher loan APR yields better savings overall. In other instances, 0 percent financing might be the clear winner.
Do you need to cash out and then refinance it later? You might have to accept standard financing through Automaker’s own captive lender to qualify for certain types of cash incentives. In the event of a loan, it’s possible that you’ll get a better interest rate than you might with your bank or an outside lender. In the case of your particular situation, your new auto loan in the next few months might be an effective strategy. However, there are some disadvantages to think about first. In particular, having two loans in a row — the first one and the one you refinance it with — could harm your credit for a time. A combination of loans can cause at minimum two marks appearing on your credit reports. Adding 2 loans added to credit report regardless of whether one is paid from the second, can lower your average age for your accounts in your credit records. When it comes to credit score the greater the average account is, the better. The most important lesson
Cash incentives can lower the amount you must credit, however refinancing it later for a can result in your credit score to take a temporary hit.
When is an offer with 0% APR really worth your time? It may be beneficial to forgo special manufacturer financing offers in the following circumstances. The repayment terms don’t fit your budget. Low-interest car loans often come with shorter finance terms. Based on your income, this can make your monthly payments unaffordable. For instance, if a 0 percent car loan is for four years, and you typically credit for five years in the future, then that price could be significant. Average rate
APR 0%
Amount financed
$25,000
$25,000
Loan term
5 years old
4 years
APR
4%
0%
Monthly payment
$460
$520
As you can see, on the basis of a $25,000 vehicle loan through an automaker for four years your monthly installment will be around $520. A $20,000 car loan with a five-year repayment at a 4 percent interest rate will require the monthly payment to be $460. You can use an auto loan calculator to do the maths for your possible loan. Experts in finance often suggest that you limit your monthly car payments to 20% or less of your take-home salary per month. Some experts recommend you at 10% of your gross income. It’s tempting to buy a more expensive vehicle You shouldn’t increase your car budget in order to get a loan. If you were planning to purchase a $10,000 cash payment for a , taking on an auto loan with a $30,000 charge just to get the benefit of financing with no interest is probably not a wise financial move. Cash rebates provide more savings Cash-back rebates often don’t apply to buyers who are using the manufacturer’s financing. If you analyze the numbers and cash rebates offer you a bigger savings opportunity, a 0 percent financing deal wouldn’t be worthwhile. Imagine taking advantage of a cash-back offer on a brand new car purchase. For a new car that has a $30,000 price tag this incentive could bring your purchase price down to $25,250. If you borrowed $25,250 at the rate of 4 percent over five years, then you’d pay the interest of $2,651. In that scenario your total expense is $27,901 as long as you didn’t add additional items such as extended warranties or incur any additional financing charges. Or, you can pay the entire $30,000 price and choose a zero percent APR. Assuming no add-on products or fees, you’d have to pay an additional $2,099 in this scenario than you’d pay by taking the cash rebate. Do’s and don’ts for 0% APR deals If you’ve analyzed all options before deciding a 0 percent APR auto loan is the right choice to make, the following do’s and don’ts could aid you in your decision-making. Don’t
Don’t
the purchase price prior to when you apply for the purchase price before you ask for the APR the purchase price before you ask for the 0 percent APR.
You can take an unrestricted loan with a significant monthly payment that you cannot pay for.
Make sure you are pre-approved to get an automobile loan prior to visiting the dealership.
Consider a longer-term loan to reduce the monthly cost of your loan if it will cost you more overall.
Make sure you are able to afford the monthly payment.
You can choose a zero percent financing option instead of cash-back rewards without comparing the possible savings.
Check if the manufacturer has incentives for cash-back that you can mix with the special financing offer.
Do not make the down payment If you are able to afford it.
The bottom line The key to determining if a zero percent APR car deal is worth your time is to evaluate it with an auto loan from an external lender and determine your actual monthly costs. Based on the circumstances, the deal may not truly save you money. There are a few instances where special financing may not be as good as it seems and getting it requires excellent credit. Be sure to check the current rates and ensure that the interest-free loan won’t cost you more in the long run.
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Written by Contributing writer Michelle Lambright Black is a credit expert with more than 19 years of experience, an independent writer, and a certified expert witness in credit. In addition to writing for Bankrate Michelle’s writing is featured with numerous publications including FICO, Experian, Forbes, U.S. News & World Report and Reader’s Digest, among others. Editor: Rhys Subitch Edited by Auto loans editor Rhys has been editing and writing for Bankrate since the end of 2021. They are passionate about helping readers to control their finances by providing concise, well-studied and well-researched content that break down complex subjects into bite-sized pieces.
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